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Patent on "Collateralized Loans" Survives Bilski, Despite Failing the MOT Test

By Peter Zura

H&R Block Tax Services, Inc. v. Jackson Hewitt Tax Service, Inc., 6-08-cv-00037 (E.D. Tex., February 2, 2011)

During litiation, Jackson Hewitt (JH) challenged numerous patents asserted by H&R Block, alleging that they were directed to non-statutory subject matter, and thus unpatentable under 35 U.S.C. § 101.  One of the patents is directed to "a system and method for distributing payments to individuals and, more particularly, to a system and method for allocating a portion or all of an individual?s payment into a spending vehicle.?

Specifically, claim 1 of the disputed patent (the '862 patent) recites:

A computerized system for distributing spending vehicles comprising:

a payment due from a governmental entity;

an assignable right to receive said payment from said governmental entity, said assignable right held by an individual;

a spending vehicle offered by a third party sponsor to said individual in exchange for at least a portion of said individual?s right to receive said payment due;

an assignment of at least a portion of said individual?s right to receive said payment to said third party sponsor in exchange for said spending vehicle;

wherein information associating said payment with said spending vehicle from said third party sponsor is stored in and retrieved from a computer to facilitate processing of said spending vehicle and said spending vehicle is issued to said individual in an amount for spending by said individual of said at least a portion of said payment, said governmental entity is electronically notified to transfer said at least a portion of said payment to said third party sponsor, and said at least a portion of said payment is received by said third party sponsor.

JH argued that the claims in the patent are very similar to the invalidated claims in Bilski, since they are directed to financial relationships, which are abstract ideas.  Also, the "computer" claimed in the patent merely stores and retrieves data, thereby making it an insignificant extra-solution component that does not meet the requirements of patentability under Flook.  Finally, JH argued that invention merely limits the invention to the field of ?government payments,? which is unacceptable under the Supreme Court?s decision in Bilski.

H&R countered that

(1)  Bilski allows specific applications of business concepts that do not preempt uses of the concept in other fields;

(1)  The claims provide meaningful limits on the exchange of financial products, by limiting the entities eligible to exchange financial products (i.e., ?individuals?) and the financial product is limited to a spending vehicle that must be offered by a third party sponsor;

(3)  The patent is limited by the computer disclosed in the disputed claims, and the system must be ?capable of notifying a government entity to transfer payment so that [the] third party sponsor may receive the payment;" and

(4)  The claim limitations do not preempt the use of exchanging financial products in other fields of use.

Surprisingly, the district court agreed with H&R:

Although an abstract intellectual concept - collateralized loans - certainly underlies the ?862 patent, it differs in important ways from the patent at issue in Bilski. Where the Bilksi patent?s independent claims disclosed the abstract idea of hedging, independent Claim 1 of the ?862 patent describes a particular application of an abstract idea, particularly, the application of collateralized loans to the field of assignable government payments in exchange for something of value. See Diehr, 450 U.S. at 187 (approving the patentability of the application of an abstract idea).

Limiting the concept of collateralized loans to the specific field of assignable government payments in exchange for something of value is not merely a field of use limitation prohibited by Flook. The ?862 patent imposes a meaningful limit that prevents the preemption of all uses of collateralized loans in the field.  . . . Particularly, the ?862 patent limits the invention by disclosing a ?spending vehicle.?   The ?862 patent clearly provides that a spending vehicle is an ?[a]lternative to cash payments,? thereby limiting the applicability of the ?862 patent to the use of non-cash collateralized loans in the field of assignable government payments in exchange for something of value.

Contrary to Jackson Hewitt?s arguments, the spending vehicle limitation is not a token or accessory. . . . In Ultramercial, the court analyzed the patentability of an invention that claimed a method for distributing copyrighted products over the internet. . . . After determining the invention failed the machine-or-transformation test, the court determined the patent at issue disclosed an abstract idea.  In rejecting the claims, the court stated that the patent lacked meaningful limits: ?That the exchange (advertisement for media) is carried over the Internet, through a facilitator, using passwords and activity logs, does not limit the patent in a meaningful way.?  The court stated that these token limitations did not prevent the preemption of using advertisements as an exchange or currency in other fields.

Unlike the proposed limits in Ultramercial, the disclosed spending vehicle is a meaningful limitation. The spending vehicle limitation leaves the door open for cash-collateralized loans to be applied to all forms of government payments (e.g., Social Security checks, 401(k) distributions, dividend payments, tax refunds, payroll checks or deposits, private payment arrangements, etc.), because the type of loans claimed in the ?862 patent are limited to the use of spending vehicles rather than cash. . . Thus, the spending vehicle limitation is meaningful because it does not preempt all uses of collateralized loans in the particular field of assignable government payments in exchange for something of value.

Accordingly, the Court finds that the claims of the ?862 patent imposes a meaningful limit, and therefore, the ?862 patent is valid under 35 U.S.C. § 101

However, the Court found that one of the patents failed Bilski, since it "[merely describes] the process of advancing money based on an income tax refund. The Court can conceive of no other way to manifest this financial relationship in this particular field. Thus, these purported limits, like the recited computer, do not meaningfully limit the patent."

Read/download a copy of the opinion here (link)

See earlier 271 Blog coverage here (link) - interestingly, the district court previously rejected the '862 patent under 35 U.S.C. § 101 . . .

Full post as published by Two-Seventy-One Patent Blog on February 09, 2011 (boomark / email).